Shares of NetApp Inc. (NTAP) went up 1.2% in after-hours trade on Wednesday after the company reported better-than-expected first-quarter fiscal 2015 results. The encouraging results were primarily buoyed by growth in branded storage equipment sales and better-than-expected revenue from hardware maintenance support contracts.
Adjusted earnings (including stock-based compensation but excluding amortization and other one-time items) on a proportionate tax basis came in at 45 cents per share, beating the Zacks Consensus Estimate of 40 cents. Moreover, on a year-over-year basis, earnings improved 16.1%, primarily due to lower share count and higher gross margins.
Quarter Details
Though, NetApp’s revenues for the quarter decreased 1.8% year over year to $1.49 billion, it came ahead of the Zacks Consensus Estimate of $1.47 billion. The year-over-year decline was primarily due to a 22.7% drop in original equipment manufacturer (OEM) revenues. However, Branded revenues increased 0.8% from the year-ago quarter and came in at $1.36 billion.
On an operating segment basis, Product revenues (59% of total revenue) decreased 5.2% from the year-ago quarter to $882.6 million. Software Entitlement & Maintenance revenues (15.0% of total revenue) decreased 3.2% year over year to $221.3 million.
Nonetheless, Service revenues (26.0%) increased 7.9% year over year to $385.3 million. Within Service revenues, hardware maintenance support contracts revenues increased 10.7% on a year-over-year basis, which more than offset the decline in revenues from Professional & Other Services (down 0.8% year over year).
The company witnessed strong demand for its storage operating system — Data ONTAP — and flash solutions. Arrow Electronics’ (ARW) and Avnet’s (AVT) contribution in net revenues were 22% and 16%, respectively.
Adjusted gross margins (including stock-based compensation but excluding amortization and other one-time items) expanded 301 basis points (bps) from the year-ago quarter to 63.9%. The improvement came primarily on the back of higher product gross margins and service gross margins.
Operating expenses (including stock-based compensation but excluding amortization and other one-time items) as a percentage of revenues increased 187 bps to 52.2%, primarily due to an increase in sales and marketing expenses and general and administrative expenses. In dollar terms, operating expenses increased 1.9% year over year.
Operating margins (including stock-based compensation but excluding amortization and other one-time items) expanded 114 bps to 11.7% from the year-ago quarter, primarily due to strong demand for its storage operating system and better-than-expected growth in branded revenues. Net income (including stock-based compensation but excluding one-time items and related tax effect) came in at $147.4 million, up from $138.8 million reported in the year-ago quarter driven by margin expansions.
Balance Sheet & Cash Flow
NetApp exited the quarter with cash, cash equivalents and investments of $5.56 billion, compared with $5.00 billion in the previous quarter. Receivables were $585.4 million versus $855.9 million in the previous quarter. The company has a long-term debt balance of $1.49 billion.
NetApp generated cash from operations of $215.5 million compared with $369.5 million in the previous quarter. The company repurchased stocks worth $119.0 million and paid dividends amounting to $53.0 million in the reported quarter.
Guidance
For the second quarter of fiscal 2015, NetApp expects revenues in the range of $1.49 to $1.59 billion (mid-point $1.54 billion), up approximately 3% sequentially and flat on a year-over-year basis at the mid-point. The Zacks Consensus Estimate is pegged at $1.54 billion.
Management expects non-GAAP gross margin in the range of 64%–64.5%, and non-GAAP operating margin in the range of 17.5% to 18%. Non-GAAP earnings per share are expected within 66 to 71 cents per share. The Zacks Consensus is pegged at 52 cents per share.
The company expects demand for its scale-out enterprise storage systems and converged solutions to increase with the adoption of hybrid cloud strategies in fiscal 2015. Thus, leveraging this demand, the company expects branded revenues to be up in mid single-digits in 2015. Nonetheless, management expects approximately 40% revenue decline from its OEM customers during fiscal 2015.
For fiscal 2015, NetApp expects gross margins to be between 63% and 64%, while operating margin is expected to be 80%.
Our Take
NetApp reported better-than-expected first-quarter results and also provided an encouraging second-quarter guidance, reflecting the company’s stringent cost control measures and continuing share buyback initiatives. Management’s positive commentary on the company’s scale-out enterprise storage systems and converged solutions bode well. Moreover, rapid adoption of the ONTAP system remains a growth catalyst, going forward.
Additionally, NetApp is gaining momentum in flash based solutions with the newly introduced all-flash array, which will help the company to gain traction in the storage market. The recent product launches and product refreshes will drive revenues and improve cost efficiency, thus enhancing margins.
Nonetheless, we believe that an uncertain IT spending outlook and competition from EMC Corp. (EMC) remain headwinds. Continuous decline in OEM revenues also remains a cause of concern.
NetApp currently carries a Zacks Rank #3 (Hold).
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